Algoritmo para Generar Desplazamientos

The above discussion illustrates that, in general, innovation market failures would be expected to be higher for smaller firms than larger firms. It was also highlighted that, while both small and large firms generate spillovers, there appears to be a bias towards supporting larger R&D-intensive firms, and that support for R&D is more likely to be additional than a substitute for private sector R&D in the case of smaller firms. Prima facie, therefore, a more cautious approach should be adopted towards approving state aid to large firms undertaking innovative projects. The identification of large spillover effects was viewed as particularly important. In respect of state aid, large firm investments are more likely ex anteto be justified on a stand-alone basis than schemes to support many qualifying small firms. Thus, spillovers will be closely linked to how radical the innovation is.

Nonetheless, much of the literature on innovation market failures either examines R&D in a very general sense (see section 2.4.2), or looks at the specific market failures (particularly financial market failures) encountered by smaller firms (see, for example, section 2.4.5); although, as noted above, coordination failures are likely to be higher for larger and more complex projects (section 2.4.4). Because of the paths followed by the literature, it is important that avenues through which innovation market failures might occur in relation to larger firms undertaking innovative projects, or larger-scale investments, do not remain unexplored.

Large investment projects—‘mega-projects’ spanning across Member States, and which are of European importance—may, in particular, be affected by additional innovation market failures (although some of these concerns might also be relevant to larger firms undertaking innovative projects).85 _{Article 87(3)(b) of the Treaty provides an exemption for state aid to be} provided for projects of European importance, although it has been little used to date.86 Ultimately, whether a project is of ‘common interest’ is a political decision. In relation to this, not all projects that may be of common interest would necessarily be justified on the basis that they are innovative or that they suffer from innovation market failures. The current report, however, focuses on the innovation market failure agenda. In this regard, objective criteria would be helpful for taking an informed decision on whether a large innovative project might qualify for consideration under Article 87(3)(b). Arguably, a thorough ex antedemonstration of the likely existence of innovation market failures in relation to the specific investment project could be required.87

85 _{To determine whether additional considerations, beyond the market failures discussed previously in this report, might arise, it} is useful to consider a spectrum of examples to illustrate the point. A large car manufacturer undertaking some innovative investments, and some collaborations with other manufacturers to reduce costs, is not in a high-tech sector, and is not as R&D- intensive as other large firms in such sectors. In this example, arguably, few additional considerations arise beyond those already discussed in the report. A large microelectronics manufacturer undertaking many medium-sized R&D projects, some of which involve collaborations, should have the financial resources to support R&D, although public support may still be justified on the basis of spillovers. Again, however, few additional considerations should arise beyond those already discussed. An aircraft engine manufacturer may represent a case of a large firm undertaking large innovative investments. Investment in new engines may be particularly innovative if they involve radical changes, and will be subject to technical uncertainty, multiple stages, and the potential for timetable slippages. This is arguably an in-between case of a large company innovating and a large-scale innovative investment, and additional issues may therefore arise. However, for innovative ‘mega-projects’ spanning across Member States, additional considerations are more likely to arise. For example, the development of new large aircraft falls within the high-tech sector, is R&D-intensive, is subject to many uncertainties, requires high levels of coordination, and has the potential to generate far-reaching spillovers.

86 _{As will be discussed below, the Airbus A380 project could have been examined under Article 87(3)(b), but this route was not} adopted. This Article can be used as a derogation to the 1996 R&D Framework, and to state aid rules in general. The R&D Framework notes that, to invoke the derogation, the project concerned must be of common European interest, which ‘must be demonstrated in practical terms’. For example, the project must represent a ‘major advance over specific Community R&D programmes’, or enable ‘significant progress to be made towards achieving specific Community objectives’. The R&D Framework notes that the derogation may apply to transnational projects of major qualitative and quantitative significance. 87 _{The analysis of the current section focuses solely on innovation market failures, rather than on EU competitiveness} considerations, or other factors. Large-scale investment projects might be granted exemptions from state aid rules, or not be classed as aid at all, for reasons other than that they facilitate innovation. Justifications based on the possibility that state aid is necessary due to subsidies provided in non-EU countries being perceived to be unfair are not discussed. Wider political objectives more generally are not discussed. Market failures are only considered where these relate directly to the size and

The market failures that may arise in relation to mega-projects of European importance are as follows.

– Spillovers—relative to SMEs and large companies, spillover effects are more likely to be economy-wide and transcend national boundaries.

– Coordination failures—large innovative projects require more coordination across

agents, resulting in a scaling-up of the effects of complexity, multiple project stages, and reliance on others. Uncertainty and uncontrollability are likely to be exacerbated at the early stages of such projects (see also section 2.4.4).

Financial market failures—much of the financing literature focuses on innovative SMEs, rather than large-scale investments. Financing problems may, however, be encountered in large-scale investments due to a ‘betting-the-company’ effect (analogous to a SME effect), risk aversion of management and investors, illiquidity of markets, and high initial outlays in CAPEX-intensive projects (again, analogous to the SME effect).

However, before exploring in detail the market failures that might arise, in order for the project to qualify for initial consideration under Article 87(3)(b), an initial assessment could be required of the following three dimensions, in economics terms:

– stand-alone—the project should be justified on a stand-alone basis;

– large—to be of common interest, the project undertaken must involve parties from a significant number of Member States, and the benefits derived from it should also span several Member States;

– innovation—since the investment must be justified on a stand-alone basis and, moreover, linking state aid to the size of the project per seis not desirable, the innovation concerned must be radical and, ideally, new-to-world in scope.

Arguably, mega-projects are more likely to pass these criteria than smaller-scale R&D investments. Unless all three of the above three criteria are met, the project should arguably not be considered further for exemption under Article 87(3)(b).

If the criteria are met, the extent to which the project is likely to suffer from spillover, coordination and financial market failures could then be considered in more detail.88

However, a principal concern in this regard is that the theory and evidence on the innovation market failures that arise in large-scale investments are very much incomplete. The case of the Airbus A380 is useful in eliciting some of the relevant issues.89 _{Moving beyond this, there} are pointers from the available theory and evidence on large-scale projects, and some lessons from project finance, utility regulation, public–private contracting and recent modelling undertaken by Oxera of nuclear power stations in the UK.

innovativeness of the project concerned. Legal issues regarding the qualification of an investment proposal for treatment under Article 87(3)(b) are not discussed.

88 _{For example, whether a project, on a stand-alone basis, leads to significant and widespread spillovers might assist in} determining, purely from an innovation market failure perspective, whether the project concerned is of European importance. Consideration of all three market failures could assist in assessing whether state intervention is likely to be additional to that which might be provided by the private sector in the absence of intervention. As noted, however, legal issues regarding the qualification of an investment proposal for treatment under Article 87(3)(b) are not discussed in this report.

89 _{Interestingly, Article 87(3)(b) was not used to approve launch aid to Airbus because, in the Commission’s view, assistance to} the consortium did not constitute state aid since it does not affect trade between Member States. However, even if it did constitute state aid, the Commission’s view has been that it would ‘normally qualify’ for an exemption under Article 87(3)(b). See response of Mr Mario Monti on behalf of the Commission to questions on the A380 project (see European Commission 2001e). However, the provision of assistance to Airbus has been controversial, and there was disagreement between the Commission and the USA over the appropriateness of launch aid having been provided to support the A380. The current report does not seek to reach a view on whether Airbus should or should not have received government support for the A380; rather, the project is examined to elicit some of the relevant issues.

The launch and development of the Airbus A380 range of jets has been discussed by Esty (2004b) and Esty and Ghemawat (2002). The studies are useful in highlighting several characteristics of the Super Jumbo project, in terms of its innovativeness and the market failures that might arise in such projects.90 _{Building upon these studies, a number of} characteristics of the Airbus A380 project can be discerned, including that it:

– was a radical innovative investment by a high-tech company with a history of innovation; – was necessary to use cooperation over four Member States;

– was high-cost, with high upfront cost, and subject to significant cost uncertainty; – involved high demand (and revenue) uncertainty over a long amortisation timeframe; – involved significant technical risks that needed to be overcome;

– constituted a bet-the-company investment.

Although not discussed in detail in the studies, the project also had the potential to lead to large spillovers, including:

– potentially reducing aircraft prices for long-haul worldwide by eliminating Boeing’s monopoly in the very large aircraft market;

– using many suppliers over several Member States; – potentially improving air travel in general.

The Airbus case provides some context to some of the issues that might arise. The key question, however, is whether the size, effects, costs, risks and complexities inherent in large innovative projects, as described above, give rise to what can be classified as innovation market failures. However, turning to each of the three market failures of interest (spillovers, coordination failures, financial market failures), the available literature is very patchy.

The potential for spillovers provides the main justification for intervention to assist large-scale innovative investment projects. If there are no significant wider benefits, in terms of public returns significantly outweighing private returns, there may be little a priorirationale for government intervention (on the grounds of innovation market failure alone). A tough stance should probably be taken towards this for very large projects, since they may involve

significant taxpayer resources. Moreover, while spillovers will be greater for pan-European projects than for smaller projects, the potential to distort competition is also generally

greater.91 _{The radical nature of the project should probably be assessed, as it will tend to be} justified on a stand-alone basis (rather than being a scheme applying to many potential qualifying firms).

Here, it is the combination of the size and the innovativeness of the project that leads to spillovers. Arguably, for large-scale projects, it is the creation of market spillovers that is the ultimate rationale for providing state support, whereas smaller projects might be justified more on the grounds of technological spillovers. The Airbus project involved many suppliers 90 _{Since these studies were undertaken, the aircraft has been developed, with the A380-100 making its first test flight in April} 2005. Initial deliveries of the new aircraft are due in 2006. Airbus announced its intention to launch the A380 range of Super Jumbos in December 2000, with the first version, the A380-100, seating 555 passengers. Innovations cited by Esty (2004b) included that it would represent the world’s largest passenger aircraft, with more space per seat, wider aisles, the safety of four engines, incorporation of the fly-by-wire technology and flight deck of the Airbus family, and potentially lower costs per passenger than the 747. The list price would, however, be higher than that of the 747. Esty (2004b) highlighted the ex ante demand uncertainty inherent in the project. (Although Airbus had secured initial orders in 2000, for delivery in 2006, there was uncertainty over long-term demand to justify the initial launch, including the long-term nature of the demand forecasts, GDP projections, market shares, fleet retirement, new routes, and flight frequency.) There were also divergences in the view on whether new routes versus larger planes were the appropriate long-term solution to air traffic growth, and the role of the rapidly growing smaller airlines. The Airbus project also involved a long design and development time and large upfront investment, and commentators disagreed on the costs and likely operating margins. The competitive response of Boeing was also uncertain. Esty (2004) described the A380-100 project as a ‘bet-the-company’ type of investment. Indeed, he commented that Boeing’s launch of the 747 in 1965 was viewed as a ‘bet-the-company’ gamble on an untested product and that, despite initial optimism, the project almost caused the company to fail. For example, there were penalties for late deliveries, and no large cash flows until deliveries were made, which left the company short of funds.

91 _{Within the EU, competition may not be distorted if there is only one manufacturer that can undertake the investment (as is the} case for the Airbus A380 project).

across Member States, but its ultimate benefit will be to lower the prices of very large aircraft worldwide. Similarly, the Channel Tunnel project resulted in knowledge exchange between the many firms involved, and itself generated additional knowledge. However, it was the end benefit of the project—in facilitating trans-European transport movements—that provided its ultimate rationale.

Nonetheless, as will be discussed below, there is evidence that, for particularly large-scale investment projects, their wider benefits (in respect of spillovers and, moreover, economic development objectives) can be overestimated. A stringent approach should therefore be adopted to the assessment of potential spillovers.

In respect of coordination failures, the literature in this area, as discussed in section 2.4.4, is patchy, as is the evidence. It is nonetheless likely that factors impeding coordination will be especially acute for particularly innovative and particularly large-scale innovative projects. In turn, these issues may provide a further justification for government support.92 _{The mixture of} exogeneity of others' actions to each firm, and the sensitivity of payoffs, may undermine the willingness of firms to sink costs into large-scale collaborations. By their very nature, the projects will tend to have high sunk and specific costs in new technologies, especially at the early stages. Due to the sheer size of such projects, technical uncertainties that arise will have a compounding effect. Selecting the correct partners may be particularly difficult, transaction costs in managing the project are likely to be particularly high, and monitoring ex post compliance of partners more complex (which may give rise to moral hazard).

These factors may not only increase the risks of the project (which would simply be reflected in a higher cost of capital), but may undermine the coordination required to undertake such projects in the first instance. In addition to affecting the willingness of firms to collaborate, these issues may have an impact on the willingness of investors to finance such projects (see below). There is potentially a close correspondence between project network effects and the cost overrun and timetable slippages (see below) that appear inherent in large-scale investments, although this link has not been fully explored in the literature.

In terms of financial market failures, the theory and evidence are again underdeveloped.93 However, certain characteristics may be present that might affect the financing of such projects. For example, large projects can either put the company concerned on the map, or destroy its competitive advantage. Large-scale and uncertain investments may involve ‘betting the company’.94 _{Managers may be especially averse to such investments where they} involve particularly large investments relative to current activities.95 _{The bet-the-company and} asset size effects are in some ways akin to a scaled-up SME effect, in that a problem stems from the new project being inherently uncertain and requiring high cash injections relative to current assets.96

92 _{Large-scale projects are more likely to be characterised by network effects, in which, to be profitable, investments must be} undertaken sequentially, and to time. They are more likely to involve projects progressing in stages, in which the payoffs are particularly sensitive to all parties cooperating and where, if one firm fails, the whole project fails. The larger the project, the more parties will be required to facilitate it (and the more diverse they will be). Such projects are also potentially more likely to be affected by adverse macroeconomic conditions.

93

Esty (2004a) notes that the financing of innovative SMEs has been explored far more extensively than financing of large projects, both theoretically and empirically, and that even less research has been undertaken on large-scale investments. 94 _{As noted, Esty (2004b) cited Airbus’s decision to launch the A380 as an example of such an investment, given the history of} plane manufacturers going bankrupt after failed launches.

95 _{According to Esty (2004a), while managers might adopt a risk-taking approach towards small investments, they adopt a risk-} averse approach to very large investments. Thus, ‘managers often reject large, risky investment opportunities, especially if they have the potential to inflict sizeable distress or, in the extreme, cause the sponsoring firm to go bankrupt’, even if these projects have a positive net present value.

96 _{These effects are more about the willingness of management to undertake the investment at all, including through the use of} retained earnings, than about financial market failures. The effect can be contrasted with the risk-averse nature of external investors, which is often cited as a potential cause of financing problems for innovative SMEs. Nonetheless, potential external